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Comment by gojomo | Hacker News Reader

This piece is very perceptive in portraying Prop 13 property-tax caps and rent-control as sibling policies, each feeding destructive "I've got mine" politics. They both bribe incumbent owners/renters/voters with an economically valuable seniority privilege, at the expense of the future and flexibility. Children and young adults suffer the most: they move the most, and none have the benefit of paying frozen base rates established 20-30 years ago.

I wonder if both rent-control and prop-tax-caps could be knocked down in an equal-protection lawsuit. Why does the person who moved in yesterday, perhaps far needier than the longer-term resident/owner (and just as deserving of basic civic services) have to pay so much more? Is duration-of-residence a legitimate basis for such strong civic discrimination rooted in law?

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From http://www.caltax.org/member/digest/may98/may98-4.htm

Almost immediately after passage, the California Supreme Court sustained Proposition 13's constitutionality in the Amador case (Amador Valley Joint Union High School District v. State Board of Equalization. September 22, 1978). After a series of legal challenges in the 1980s, the issue of acquisition-value assessments reached the U.S. Supreme Court in Nordlinger v. Hahn. In a stunning 8-1 decision, the court in 1992 upheld California's acquisition-value system.

The court ruled that an acquisition-value system does not violate the Equal Protection Clause of the U.S. Constitution because it rationally furthers a legitimate state interest. The court said, "The state legitimately can conclude that a new owner, at the point of purchasing his property, does not have the same reliance interest warranting protection against higher taxes as does an existing owner who is already saddled with his purchase and does not have the option of deciding not to buy his home if taxes become prohibitively high."

The court also opined that a state has a rational interest in neighborhood preservation, continuity and stability, and that Proposition 13's system of "locking in" lower tax assessments contributed to such preservation.

For the curious, because it doesn't affect a fundamental constitutional right, the equal protection challenge will get evaluated by the rational basis test. As long as it is rationally related to a legitimate government interest, it will be upheld.

Isn't equal protection, without regard to a superficial category like length-of-residency (which is itself highly entangled with age & race), a constitutional right?

What it actually means is subject to much debate. Wikipedia surprisingly has reasonable coverage of this.

http://en.wikipedia.org/wiki/Equal_Protection_Clause

See tiered scrutiny.

In particular - age is not a suspect classification, so the strict scrutiny test does not apply.

Suppose we throw the concept of a Sundown Town (http://en.wikipedia.org/wiki/Sundown_town) into the mix.

It seems reasonable to me that laws or policies that favor people who have been residents of a town for a longer period of time could be used to preserve Sundown Towns. It's fairly easy to see how these policies would benefit those who seek de facto segregation.

> Why does the person who moved in yesterday, perhaps far needier than the longer-term resident/owner (and just as deserving of basic civic services) have to pay so much more?

Property taxes without caps are just as unfair but in the opposite direction. Why should someone who lives within their means and bought an affordable house be punished just because a bunch of other people swoop in and drive up prices around them. A buyer of a house needs to be able to forecast future tax payments to make an informed decision. If you don't have a yearly increase cap on property tax rates, the buyers future costs are totally unpredictable and up the whims of the markets and bubbles.

Let's also not forget that a resident in an area does have a say in property taxes. That's the whole idea around local government. Show up to town hall, be vocal about your opinions and listen to others' opinions. This is how it should work. If you want lower property taxes, make your case! Convince your friends & neighbors.

Also the money isn't being taken for the sake of encouraging productive use of land, it is paying for government services. Perhaps people who have locked in lower tax assessments should have their garbage picked up less frequently, have limited use of parks, and have lower priory status for police and fire services. Or do prop 13 supporters prefer a heads I win, tails you lose system?

If your car payment got untenable, we won't see folks lobbying for car-payment support or caps. You'd just have to sell the car.

Houses get some sort of special treatment, I guess because people emotionally bond with them. But in a free market we'd not scotch-tape all these special rules around them.

What car-owning scenario is comparable to government driving someone out of their home via unaffordable tax assessment?

Not comparable, but related in its idiocy: governments making the purchase of a Tesla illegal in their state.

You said 'home'; I said 'house'. This underlines the emotional aspect perfectly, thank you.

The government raising road/gas taxes to the point where you can't afford to run a car any more?

Terrible comparison. Your car payment doesn't tend to increase unpredictably with your car's value over time, as property taxes almost certainly would.

Yeah but your income can, with the same effect.

I agree that it's not a good comparison. Property tax is more like a cost of ongoing operation, so a better comparison would be to the cost of gas.

Selling your car has hugely less impact on your life than having to move. It's not just an "emotional bond" with a house. It's your commute. Your kids' schools. Your friends. Your daily shopping routines. The cost and labor involved with packing your stuff and moving it to another location. And so on. Moving can be very disruptive, especially if you have to move to a totally different town or neighborhood as would likely be the case if you got pushed out by rising property taxes (as the other housing in your vicinity would have the same issue).

Losing your car affects that too - you'd likely have to move. But yes, housing is a bigger hit.

Still, people move for all sorts of selfish reasons, and take on all that burden anyway. The difference between the free market making you do it is an emotional one.

If my neighbor buys a Ferrari my Subaru doesn't suddenly cost 10x in gas/maintenance as a result.

There is a good argument here, actually. Because of all these people having more and more cars, fuel prices have increased significantly. If you bought a car 10 years ago, you now spend much more money for fuel than you did back then.

Should you be able to buy fuel for the same price it was when you bought the car?

This is the essence of the arguments for Prop 13. In places with re-adjusted and higher property taxes (like Texas), the property tax serves to keep a lid on housing prices.

Give me a moment while I play sad songs on this tiny violin for old people who are sitting on valuable assets.

tiny violin songs, very sad

OK then, let's talk about reality. Letting incumbents under-utilize valuable real estate is a bad policy. Anyway nobody gets thrown out of their house for owing property taxes in California because the local authorities just put liens on the property. Once the old folks kick the bucket, the local govt collects on their lien from the heirs or buyers.

There are also several other non-old-people-getting-evicted problems with Prop 13 and its siblings. There certainly is not any excuse for the ability to pass your property tax assessment on to your children or grandchildren.

> Letting incumbents under-utilize valuable real estate is a bad policy.

If the value of the property increases, there is incentive for owners to sell. If a developer wants to "utilize valuable real estate," is it not better that they make an offer and that people have choice in what happens to their property, rather forcing out "incumbents" with no choice due to escalating tax costs?

Buying a house with potentially wild inflation of tax costs is about as attractive as buying a house with a variable APR.

> If the value of the property increases, there is incentive for owners to sell.

Prop 13 counter-acts the incentive given by market appreciation of the value.

The value may go up according to the market, but the owner's taxes are capped.

This is an incentive to stay, as an owner would face higher taxes and thus higher costs if they simply moved to an identically-priced home.

Florida recently solved that problem by making homestead caps transferrable after a certain period of time.

This has been possible for decades in California under a later proposition. People over age 55 (iirc) can transfer their assessment to a property of same or less value within or between participating counties. Not all counties participate but several populous counties do (including Alameda).

Only 9 counties participate in inter-county transfers

http://www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm#1

And as you point out, if you are under 55 then none of this applies.

> The value may go up according to the market, but the owner's taxes are capped.

So, the value according the market is not accurate. The value is actually higher. The problem isn't the laws. The problem is the market simply doesn't want to pay an appropriate amount for the person's property.

> So, the value according the market is not accurate.

I'm not sure how a market value can be inaccurate, that implies that there is some objectively correct non-market value that you could meeasure the market value against, which is an odd idea.

What Prop 13's limit on assessment increases does is (in terms of the forces that drive market prices) is decrease supply (because it increases the value of homes to people who already own them, by decreasing the cost -- in property taxes -- paid compared to the utility derived from holding the property), which, considered on its own, increases market clearing price.

It may also increase demand (since it also decreases long-term expected costs for new buyers), but probably more weakly than it increases supply (since the decreased cost is already being realized by sellers -- and more strongly the longer they have held the whome -- wherease it will take several years for the decreased cost to be realized by a new buyer, since purchase events trigger assessment at full value.)

> The problem isn't the laws. The problem is the market simply doesn't want to pay an appropriate amount for the person's property.

The law adds non-transferrable value (or, less simply, provides a non-transferrable abatement of cost) as long as the owner holds the property. This creates an externally-imposed difference in the value to the owner and the value to other market participants.

> Buying a house with potentially wild inflation of tax costs is about as attractive as buying a house with a variable APR.

The one and only reason the US has 30 year fixed rate mortgages, with no prepayment penalty, available levered 5-10x, all at less than 100 bps over the risk free rate is because of massive government implicit and explicit subsidies.

Absent distortions it doesn't make sense for most people to buy a house -- it's inherently non-diversified, low liquidity, high transaction costs. But American society has for some bizarre reason decided that home ownership is the sine qua non of human civilization and so every level of government intervenes to distort the market in favor of homeownership.

Instead of recognizing this extraordinary intervention, and perhaps being grateful, homeowners tend to either: 1) refuse to recognize that such massive subsidies exist, or 2) see as entirely natural -- and bitch and moan if even the slightest modification is proposed.

It's yet another example of the American phenomenon of socialism for me but not for thee (and none dare call it welfare).

On the contrary, Fed and Census data indicates that the net worth of the average homeowner is 30x greater than renters. Part of this is certainly some selection bias. More wealthy people buy homes.

But it's more than that. The truth is, buying a home is the only form of investing on margin for most. Also, it's compulsory investment and savings -- both with the principal payment and in the form of property improvements.

Finally, of course, are the myriad tax benefits.

While it's true that we incentivize home ownership, possibly too much, I think it's unfair that you paint it as an otherwise neutral activity that we strangely endorse with public policy. Land has real value, you can live on (and off) it. It was long seen as the one enduring source of wealth (See John Adams, George Washington, etc). It's much deeper than our postwar tax policies.

> The truth is, buying a home is the only form of investing on margin for most. Also, it's compulsory investment and savings -- both with the principal payment and in the form of property improvements.

I find it weird that people look at houses as "investments". For an asset to be an investment for me, it has to be productive. Buying stock in a company or starting your own is productive; buying farm land is productive (you can use it to produce food). A house in itself doesn't produce anything, it's just an asset. If you're relying on buying it cheap and selling it at a high price, that's speculation, not investment (that house still hasn't produced anything, it just happens to be more valued by other people).

umm, it produces shelter.

You can rent for about the same money, and still get shelter. There are convenience advantages for owning your own home, but it still seems like a bad "investment" to me.

True, but not at a fixed cost, and with no guarantee of residence. For people with families, the elderly, and people with strong community connections, the value of having a shelter that you own has substantial value.

You can also customize and improve a home you own. Many people have housing needs that cannot be met in the rental market. With a home you own, you can make the modifications you need, and accept the impact to your home's value.

> You can also customize and improve a home you own. Many people have housing needs that cannot be met in the rental market. With a home you own, you can make the modifications you need, and accept the impact to your home's value.

Sure, I agree with all of that. However, none of these qualify as economic investments IMHO, unless you decide to start a business out of your home.

Keep in mind I'm focusing strictly on investment in economic terms (production of goods or services). I agree that the house provides various benefits to its owners, just that none of them are economic returns.

I think you have a very narrow definition of "investment" that doesn't match how others use it. I challenge you to explain why speculation in equities is an "investment" but speculation in real estate isn't. Suppose I create a corporation, sell shares, buy real estate, sell it for more money, and return value to shareholders. Is that an investment?

I think your argument is thin here.

> I challenge you to explain why speculation in equities is an "investment" but speculation in real estate isn't.

Speculation in equities is also not an investment in my book. I was referring to buying stock long-term for the dividends, not short-term speculation.

When does it become "long term investment" and not "speculation"?

I think your argument is thin here, too.

Dividends, as opposed to earning with a stock price increase.

So commodities aren't investments?

"define: commodity" on Google gives me: "a raw material or primary agricultural product that can be bought and sold, such as copper or coffee." By this definition, "commodities" are also materials that can be processed into something more complex, adding value, which makes them great investments. That's not why people usually buy a house.

I disagree. Commodities derive value from 2 things:

1) Usefulness

2) Scarcity

Something useless and abundant has little value, something very useful and scarce has high value. A house is useful (it's a place to live, with varying personal usefulness based upon geographic location; a house 3 states away from my job is personally not very useful to me, for example) and scarce for any given geographic location.

The fact that copper is useful because you can build stuff out of it, while houses are useful because having a place to live is useful is irrelevant.

[edit] And the both the usefullness and scarcity of houses can change (just like with copper). Someone comes up with a cheaper way to mine copper? Price drops. A locality loosens their zoning laws? Price drops. Someone finds a new, valuable use for copper? Price rises. Big tech boom in the bay area? Price rises.

But that's not at all what fuels the commodity market! People "invest" in precious metals so they can convert them into something else?

Anyway, I'm done with this discussion. Feel free to have the last word. It's clear to me that you've made-up your own definition of 'investment' and cannot see past that. Totally your right. But for the rest of us, here's what investment means:

investment noun : the outlay of money usually for income or profit : capital outlay; also : the sum invested or the property purchased

I'd need to see a lot more justification before accepting that leveraged investments are a net positive either for individuals or for society. In general, leverage increases variability while reducing expected value in the form of interest payments. In other words it is analytically opposite of insurance.

I do agree that program or automatic savings are a positive "nudge" both for individuals and for society, but there's nothing but status quo bias that says that this asset class has to be the heavily favored vehicle for that.

Prior to the industrial revolution land was the primary means of production. Today that's no longer true, and the vast vast majority of real property (by value not acre) is not used as an input factor for goods. The best translation of those classic references to the importance of land ownership today are modern means of production (e.g. ownership shares in productive businesses), not a quarter-acre of lawn in the suburbs.

Governments ought to be encouraging investment in positive sum productive enterprises, not zero sum positional goods. And at least as a default bias for non-wealthy citizens it ought to encourage holding diversified portfolios of assets with transparent liquid markets and low transaction costs.

Appreciate the grey matter behind this response. I'll write more later. But the Adams and Washington example... possibly your point speaks to their frame of mind, but both these guys were land speculators who bought land which in some cases was remote and in a wilderness. They bought the land because they believed that property, unlike a business, is not subject to fraud or bankruptcy, it's durable, and with a growing population it's likely to continue appreciating. That's just as true today.

There is a very good economic reason for encouraging people to own property, and that is to do with collateral and their ability to take risk. Once you build up a strong financial asset such as a house, it can provide a basis for collateral and allowing you to take new business risks. Lack of property rights and collateral are a key reason that so many people around the world are trapped in poverty as they cannot secure funds to invest in their businesses and grow their wealth. As the saying goes, it takes money to make money. For more information on this look at Hernando De Soto's writings on property rights.

What you propose is not at odds with what you are replying to. Imagine an alternate timeline of the US where we did not promote homeownership. This alternate US would likely have many many forms of REITs, in which regular people could invest in. No one would have to buy a whole house, just participation in one or more homes, perhaps a subdivision or even a city. This alternate timeline would promote more focus on increasing the value of the city than the value of a single home.

It would also reward those who got there early without allowing them to block all progress since there is financial benefit for all.

>Absent distortions it doesn't make sense for most people to buy a house -- it's inherently non-diversified, low liquidity, high transaction costs. But American society has for some bizarre reason decided that home ownership is the sine qua non of human civilization and so every level of government intervenes to distort the market in favor of homeownership.

The thing is? Leases are... very inflexible. In many ways, it's less flexible than buying. Here is the essential problem: If I have a rational, profit-maximizing landlord, every time my lease is up for renewal, he increases my rent to what it would cost me to rent an equivalent place elsewhere plus just under what it would cost me to move. On the other side of that, if I take a longer lease, I'm in a seriously bad position if something changes in my life and I need to move.

This is especially dramatic in commercial real-estate, where the business owner is usually asked to personally co-sign the lease, and where there are fewer laws requiring the landlord to reasonably try to rent vacant units to other people. (and where the tenant is more likely to be able to keep paying rent after moving.)

Three to five years of rent is nearly always more than 6% of the purchase price of the property.

You realize prop 13 is a statewide policy, not just a north beach community standard, right ?

So while you're thinking of (and playing violins for) a certain sect that you know well here in the cosmopolitan city, there are also hundreds of thousands of "99 percenter" property owners throughout California that really do hurt as they scrape to make ends meet with the major (and usually only) asset they will ever own.

One half-fix sometimes proposed to solve the most egregious Prop 13 issues but leave it in place for the people you're talking about is to limit it to only owner-occupied primary residences. As it stands today, Prop 13 applies to not only homes people actually live in, but also investment property, vacation homes, even commercial real-estate. Imo any "protect the nature of our community" / "keep old people from being displaced" type justification makes a lot less sense when we're talking about Intel's property taxes, or about property held by real-estate investment trusts.

I think this is far more reasonable.

Solution: Split Roll [1]. It would prevent egregious abuses of prop13 like the transfer of ownership coordinated for Ernest & Julio Gallo winery [2], wherein a sweetheart tax valuation on property was transferred to a new owner without triggering a tax re-evaluation, while removing any impact for 99 percenters (and even some of the 1%).

[1] http://articles.latimes.com/2009/jul/13/business/fi-hiltzik1...

[2] http://www.car.org/meetings/carmeetings/committee-materials-...

>...Anyway nobody gets thrown out of their house for owing property taxes in California because the local authorities just put liens on the property.

Who are you kidding? You get a lien on the house and then that is used to force a sale to cover the amount due. Hell even home owner associations do it all the time if you don't pay your monthly dues for several months.

So the solution, as 'raldi insightfully suggests, is simply not to consider the lien due and payable until the house is sold.

I'm not enough of a lawyer to know exactly how that should be structured, but it's a great solution.

This would make underwater mortgage holders (at least lower-income ones) to stop paying taxes completely. After all, they've already lost their money, and have no hope of getting anything out of the sale, and there's no way anybody gets anything more out of them, it's bank's loss now. Moreover, it is in their interest to postpone the sale - since until sold, bank's incentive in eviction is much lower, and incentive in just discharging the part of the mortgage is higher, due to additional buyer costs. So if you shift the tax burden essentially to the buyer of the house, the consequences may be not that good.

The property owner would still be liable for annual tax payments on the assessed value of the property. When that is falling, the Prop. 13 limitation has no effect.

The lien we're talking about would be on the difference between the tax paid under Prop. 13 and the tax that would be due if there were no Prop. 13. If the mortgage is underwater, that difference is zero.

> Who are you kidding?

Please don't address other users this way on Hacker News. Civility is important here.

The comment is otherwise substantive and would be a fine one if that bit were simply deleted.

This is a pretty inhumane way of looking at property. It's not just about optimization of real estate, when people buy a home, they plan their lives around it. They raise their children in it. There's a huge emotional investment in our home, that is part of being human.

Property tax caps are perfectly fine. As a homeowner, I will always vote down ANY increase in property tax.

Your mentality values economic optimization over human optimization, and it is one that I reject.

Sure, everything you say is true, but only for a narrow slice of the real estate market. Did Intel raise their children in their HQ building? No, but their property taxes are protected by Prop 13.

We invest a lot emotionally in our businesses too, but yes, at most we'd have to make those taxes conditional. But then of course, if homeowners get a break and business owners do not, most businesses will move out of cities and other urban areas after a while, and that's not good for society in general.

I see your point, but when that person decides one day to sell their house, suddenly they're done pretending it never appreciated in value.

In other words, instead of the state foregoing that person's property tax adjustments, it should defer them until the time of sale, and at that point, recover them.

>In other words, instead of the state foregoing that person's property tax adjustments, it should defer them until the time of sale, and at that point, recover them.

In other words a lien.

Exactly. If you'd have owed $11,000 this year without Prop 13, but because of it are just paying $1000, the other $10,000 should be applied as a lien against your house. Even 30 years of these liens will leave a sizable chunk of profit to you, considering you're capturing 30 years of appreciation.

There's an assumption here that property prices always go up. What if assessed value during the boom times of 2006-2008 was so high, that accumulated tax obligation exceed or are close to the current value of the property?

That's what I'm talking about here: https://news.ycombinator.com/item?id=7593235

My first impression is: That will add an even bigger chilling effect than we already have w/ Prop13. More people would stay put (or just avoid selling.)

Also it's not like values are an eternally increasing step function. Suppose I bought in '95, saw my paper net worth rise thru the boom, then I need to sell at a depressed price in 2001. Without this lien waiting for me, I can take comfort knowing that I'm selling at a depressed price but also buying again at a depressed price. But when you take tens of thousands off the table to pay back taxes, my down payment has eroded significantly, increasing my borrowing cost.

Of course outside of California most people are used to periodic reassessment. It's just part of life. But I think tinkering w/ Prop13 in the ways you describe are possibly worse than just eliminating it and replacing it with an expanded homestead exemption of some kind.

I agree, some accommodation should be made for bubbles. Perhaps the rule should be, not that you accumulate unpaid tax every year based on the difference between what you paid and the assessed value as of that year, but simply that the assessed value is retroactively considered to be the average of the purchase price and the sale price. This would penalize windfall profits, where the market takes a sudden leap and then you sell, but would provide some protection against bubbles.

I'm the guy from up the thread, and I endorse this plan.

There's already a capital gains tax to penalize excess profits when selling.

I addressed this here: https://news.ycombinator.com/item?id=7594651

Or a capital gains tax. Which avoids the problem with building up the debt during a boom and being underwater on it if selling during a bust.

I addressed that here: https://news.ycombinator.com/item?id=7594651

Which it will, in the form of transfer taxes and capital gains taxes.

In California, married couples pay no capital gains on the first $500,000.

http://www.nolo.com/legal-encyclopedia/avoid-capital-gains-t...

And the transfer tax doesn't hold a candle to the lost property tax revenues on, say, 30 years of ownership.

I think a balanced proposal would be to enable someone to lock in their property tax but forfeit some percentage of the capital gains to the state at death.

> just because a bunch of other people swoop in and drive up prices around them.

Because they are now wealthier, and can convert the wealth of that house into liquid assets (through sale, remortgage, etc), or income-generating assets (by becoming landlords). That's one of the points of property taxes: to encourage people to do productive things with their asset instead of just sitting on it.

An equally anecdotal counterpoint: "Why should a real estate speculator who bought a house twenty years ago not be forced to pay increasing amounts of property tax on it as they wait for its value to go up?"

So the argument here is... that people who are wealthier than I am and/or better at playing the finance game than I am should have my property transferred to them through coercive state action, since they can be trusted to use my property "productively" while I can't?

Is this really HN I'm on here?

Remember, the whole problem here is that your property is now worth more than you paid for it. That "coercive state action" will leave you with a substantial pile of cash, which the income tax laws will even let you keep.

Anyway -- you've never heard of a home equity loan? If you really want to hang on to the property, take out a loan, pay the property taxes with part of it, and use the rest to make the payments. Zero cash flow impact. Or, sell a partial interest in the property to a speculator. There are solutions.

And as 'raldi points out, Prop. 13 could have been written so the accumulated difference between tax assessed and tax paid would have been collected at the time of sale. That would have addressed the owner's cash flow problem without requiring financing, without cheating localities of taxes they need to provide services -- not least, education -- and (getting back to the point of the article) without disincentivizing residential development vs. commercial.

I'm still not sure I'm on HN. Where is the person explaining that property tax is theft via government literally holding a gun to your head?

I was never that person.

There's a very limited supply of SF. We've recently collectively realized that it's worth more than we thought. So yeah, if you want to keep retaining exclusive use of a particular piece of it (you have the coercive state action part backwards - property rights are not a natural right, they only exist through government action), you'd better pay our governmental institutions according to the present market rate, just like you'd pay for radio spectrum or any other limited public resource.

> Why should someone who lives within their means and bought an affordable house be punished just because a bunch of other people swoop in and drive up prices around them

Indeed one of the huge stories around Prop 13 was an elderly woman with a paid-off house, about to be evicted because she couldn't pay the ridiculous uncapped property tax. She went to city hall with Howard Jarvis to ask for help and when turned away, had a heart attack and died right there in city hall.

http://www.hjta.org/propositions/proposition-13/proposition-...

From the article (which note is published on the Howard Jarvis Tax Association website): "Howard Jarvis told the story of watching an elderly lady suffering a heart attack while visiting the Los Angeles assessor's office when she couldn't convince the authorities to change her tax bill." Doesn't mention the woman dying, just that she had a heart attack.

Also, the anecdote comes from Howard Jarvis himself. Was he lying to further his agenda? This source casts doubt on his story: http://www.americanlibrariesmagazine.org/blog/happy-birthday... - from that source: "White notes that “even though the age of the deceased woman varied as Jarvis repeatedly told this story, the feelings it generated resonated with the public.”" Smells fishy to me...

"Stories used to sell political positions" ⊄ "Facts"

That's, like, the firstest of first world problems:

- My land value has skyrocketed.

- Now I can't afford the property taxes and have to sell the land and retire several times over.

If you can afford to retire several times over, it would by definition have to involve living in a less expensive place (otherwise you'd have the same tax issue). Being forced to downgrade housing quality and/or location is not an obvious win.

Oh, definitely. But when it comes to "problems we should all have to bear a burden to prevent" -- the target of public policy -- it just doesn't seem like that particular problem should be very high on the list.

It's not that being priced out is a pure good; it's that it naturally comes with effects that very much soften the blow (at least for homeowners). It's not the sort of extreme personal catastrophe that social policy tries to mitigate in general.

Don't forget how things used to be -- a single earner working at a factory could buy a house comfortably. Those were the folks impacted.

I mostly agree, however I find moving house is a complete PITA, and I'm fairly young. For someone in their later years, the stress, their physical limitations etc make it very difficult. I don't think its possible to over estimate the difficulty an elderly person could face when forced to move.

Each asset has ownership costs and risks associated with it. The uncertainty of the future cost of ownership is a risk you take on when you buy the asset.

It seems fair to me that the risk of the future variability of the cost of ownership of a property is assigned to the owner of the property.

I understand why you'd rather have someone else take on the risks, but newcomers are an unfair pick. How about an insurer or another financial counterparty? I'm sure it's possible to come up with some synthetic instrument which mimics the price movement of the property and can serve as a reliable hedge.

If done correctly, the price appreciation of a home and tax increases should be unrelated. At least in NY, your share of the property tax levy is the value of your property divided by the value of all properties in the taxing district, multiplied by the total tax levy. If everyone's property appreciates 10%, but the tax levy stays the same no one has higher property taxes.

The reason we have higher property taxes is that school boards and the town/county government continually pass budgets that outpace inflation.

What's special about property taxes that they should be held constant? A person could just as easily be pushed out of their house by a general rise in the cost of living in their area, or increasing traffic, or a regional economic collapse. Shall we legislate those to be constant as well?

If the local government is well run, then an individual's property taxes should approximate the cost of providing local government services to them, regardless of the value of their house. If real estate values in a local jurisdiction double without changing the government's costs, property tax rates should be cut in half to compensate. I realize that there's a big "if" when it comes to the "well run" part, but if that's not being done, then you need to fight over the "well run" part, not giving people massively different tax rates based purely on when they bought their house.

I don't think this idea is all that outlandish either. My understanding is that a lot of jurisdictions work this way, either explicitly or effectively through the legislative process. A budget is set, required revenue decided upon, and property tax rates set such that the required amount is obtained. If values go up, rates fall, and vice versa.

This doesn't solve the problem of hyper-local changes, like if just one section of a county becomes extremely popular and prices are driven through the roof, while the rest is unaffected. But again, what's the difference between being driven out due to that and having, say, the local food stores double their prices to to huge demand and drive you out that way?

You raise an interesting point related to something I always point out to people in economics debates:

Every time you see a dysfunctional market, look for the policy which creates an asymptotic condition. That asymptotic condition (or the sum of several asymptotic conditions) is the likely culprit behind the dysfunction.

By asymptotic condition I mean and hard cap or limit that is unchanging based on circumstance (such as time). The reason asymptotic conditions are so toxic is because they become barriers to natural market corrections.

Related to your equal-protection observation:

An interesting thought experiment is imagining a policy that allows the eviction of those with rent-control in favor of those who can demonstrate more financial need. I'm trying to imagine how to form this so I can propose it to San Franciscans with rent control when they express ire about techies and the Ellis Act. I'm extremely curious how they will react/respond when they are asked to explicitly acknowledge their position of privilege relative to someone less well off.

Unrelated: Ultimately what we need is the startup equivalent of cities, where people abandon the status quo in established cities and seek out new civic models. Given the right location, I would consider being a founding citizen in a "startup city".

You could say the same thing about immigration, and infact you should. That comparison I feel, brings out the explosive politics that is behind these kinds of policies.

This is why the whole concept of renting seems bad to me. If you don't have rent control, you are condemned to a future of uncertainty, as you can never retire in case prices go up. You also pay money but never see any permanent return, as it doesn't matter how long you've been paying, you can never stop.

True, renting does not give you rights, and I see no reason why it should. But do not risk believing that buying a house for youself is a true investment.

I have been renting for last five years, and I see nothing bad in renting. Though my opinion might be irrelevent to the subject, as I do not live in SF and there is no "frozen property taxes" law in UK.

In the US, the http://en.wikipedia.org/wiki/Home_mortgage_interest_deductio... on your first home makes a huge difference when making rent-vs-own plans. It wasn't obvious to me when I first started making rent-vs-own plans (I'm not a US citizen).

In 30-year mortgages you are realistically paying more than half your monthly payment as interest, and doing that with pre-tax money means you're conservatively looking at 15% total reduction in monthly payments compared to renting.

As stated above, it really depends on a number of factors whether renting is cheaper or more expensive than buying.

You are right that the US has two things to advantage owning: (1) mortgage interest tax deduction and (2) 30-year mortgage terms.

If you're lucky enough to lock in a mortgage rate of ~3%, when you add in the mortgage interest tax deduction, you're practically paying nothing for the money you are borrowing.

However, all it takes is a 10%+ drop in the market when you are selling to wipe out any advantage to owning and often you'll come out behind of someone who rents.

We're pretty far off topic now, but this benefit has been overstated. In most of the U.S. -- the areas not discussed in this article -- cheap housing is the norm. If you have, say, a $150k mortgage at 5% for 30 years, then your yearly interest is going to be less than $5k. That's less than the standard deduction.

Essentially it's a tax write-off for the wealthy.

Not at all. The deduction (all itemized deductions in fact) phases out starting at $300k household income, which is pretty trivial for a 2-techie couple in an urban tech hub.

A "2 techie couple in an urban tech hub" is "the wealthy".

I disagree - but even if I concede, you're proving my point.

$300k household income, which is pretty trivial

Anything over $250k puts you in the top 2% of U.S. households. Your definition of words like "trivial" and "wealthy" might be different from mine.

No, because wealthy families are typically hit by AMT, not income tax, and mortgage interest is only deducted under income tax.

It's a write-off for someone who's making enough money to find it worthwhile to itemize but not enough to pay AMT.

Wealthy families also have access to higher-quality asset-backed loans which typically come with lower interest rates.

This is inaccurate. The AMT disqualifies home equity loan interest, but not purchase loan mortgage interest. It does remove the deduction for property taxes (and other state/local taxes), which is perhaps what you were thinking of.

Unless you call "wealthy" anybody who owns 20% of a house, not really.

>I see nothing bad in renting.

The rub usually comes when you are older and your earning ability deteriorates. Those who own their house get a significant drop in monthly housing costs while those who are still renting to not. Some people plan well for this, others don't.

Not that this is the best place to hash out a buy vs. rent argument (the answer of course is, it depends), but there are loads of uncertainties associated with buying. How high will my property taxes go? Will the market where I am go up or down? What will my future maintenance costs be? Will I have to pick up and move to another city unexpectedly? Variability in all of those affects what kind of return you get on buying, if at all.

Then there are the transaction and opportunity costs associated with buying...locking up a down payment, closing costs, broker costs. I'm sure I'll buy in the future when I'm at a different point lifewise, but for now renting works just fine.

This is why I hate property taxes. It means that I can't just buy a house and live in it. I have to make sure my house doesn't get too expensive for ME to live in. I can't just look forward to retiring in my house. It's taxes until I die.

Even in the absence of property taxes, utility and maintenance costs (and changing market rates for required labor and materials that drive those) would pose the same risk. Property taxes are hardly the only required expenses that might go up when owning a house (and, in CA, have strict constitutional limits on increases, unlike most other necessary expenses.)

Isn't the issue with property taxes that weath taxes are not legal under the constitution. The government is not allowed to just tax (ie, take) your assets. Income and Real estate are just imperfect proxies "wealth".

> Isn't the issue with property taxes that weath taxes are not legal under the constitution.

No, because that's not true (federal property taxes would probably be problematic under the Constitution, which restricts non-apportioned federal taxes, but property taxes aren't federal.)

Property taxes are used (primarily) because states & localities don't have clean jurisdiction or nexus on a household's financial assets.

(which makes "wealth" taxes problematic or impractical)

Do you have a better method for accounting for the externality of restricting that land to your private use and accounting for your local externalities?

(This is not a rhetorical question.)

The amount of wear one homeowner causes to the roads or the amount it costs to educate one family's children is not dependent on local property values.

And the "externality" in restricting that land to your private use is captured by the housing market. If you're sitting on a plot of land worth a million dollars, it means you value that land at more than a million dollars, because otherwise you would sell it. Sitting on it is costing you access to a million dollars. Living there is costing you the money you could get by renting it out.

That is true, but you have to remember that rates are often adjusted when property values increase. In other words, if home values double in 5 years, the city doesn't get twice the property tax revenues, as the rates are often adjusted downward to meet the desired budget.

> That is true, but you have to remember that rates are often adjusted when property values increase.

If your argument is that the property tax rate on a million dollar home will be lowered until the absolute number of tax dollars paid is the same as that paid on a $250K home, the evidence is to the contrary. Municipalities that see an increase in tax revenues at the same rate more often see it as an excuse to expand the budget than an excuse to lower tax rates, especially in California.

I'll admit my anecdote is an outlier, but I have seen a few examples of it.

Take a look at local city budgets. When housing prices doubled, the cities tax revenues didn't. They certainly went up overall (I mean, when has a gov't ever not expanded?), but my argument is that often 2house price =/= 2property taxes.

That's because, again, in California, rapid market value increases of individual properties aren't immediately factored in to tax basis (because assessed value for property tax purposes can only increase 2% per year without a sale or new construction), but individual value decreases are immediately reflected in tax basis (because there is no cap on decreases in assessed value), so if prices of housing in an area double on average, but only a small percentage of units change hands, you see a very small increase (at most) in overall tax revenue.

That's an effective cut in the overall property tax rate, but its not a city "adjusting" the rate down to meet the desired budget, its the nominal rate remaining fixed (because that's also capped by Prop 13), and the tax basis value on most properties whose value has increased not reflecting the value increase.

My anecdote is from a city that doesn't have a property tax increase limit. Housing prices doubled in the span of 5 years, but the cities total budget only went up by 30% or so. The mill rate actually decreased.

> That is true, but you have to remember that rates are often adjusted when property values increase. In other words, if home values double in 5 years, the city doesn't get twice the property tax revenues, as the rates are often adjusted downward to meet the desired budget.

That almost never happens. OTOH, in California, if a home doubles in value in 5 years and doesn't change ownership or have new construction, the assessed value for property tax purposes at the end of that 5 year increase would only be 1.1× the starting tax basis, since Prop 13 limits assessed value to increase at most 2% per year.

The quantity of roads in length and width available increases and I wouldn't be surprised if the cost of supporting that infrastructure rises with the square of the land accessible by those roads (i.e. one long road is much cheaper to maintain that a grid of roads with equivalent length in miles). If the homeowners are only allowed to drive on the roads that were there when they bought their home the situation would be fair.

Education on the other hand I expect to remain fairly constant on a per unit (child) basis once a school hits 150 children per grade.

> And the "externality" in restricting that land to your private use is captured by the housing market. If you're sitting on a plot of land worth a million dollars, it means you value that land at more than a million dollars, because otherwise you would sell it. Sitting on it is costing you access to a million dollars. Living there is costing you the money you could get by renting it out.

Here in London there are whole apartment blocks owned solely by investors with no-one living in them. That's morally repugnant, a deadweight loss, whatever sophist arguments you can come up with for why really the right thing. Property taxes are a nudge in the right direction.

In the UK 'council tax' is paid at a level set, in bands, by the value of your house and your band is generally not reassessed unless you request it. Additionally, if you're unemployed, retired, or the house is 100% occupied by students, the amount payable is reduced (to £0 in some cases).

The charge for council tax is set at the 'band C' level, and scaled up/down for bands A-H. (A being the lowest property value.)

Additionally we have 'stamp duty', which is paid when you sell the house, as a percentage of the sale price above a threshold, and if you've lived in the property for less than three years you're also liable for capital gains tax on the sale.

This isn't an ideal system - but it does present an alternative to what's being discussed here. I imagine that a quick trip through Wikipedia would show other alternatives in use throughout Europe.

If you buy a $500k house you pay $5k/year in prop taxes. If that home doubles in value, you have $500k more in wealth (that you can tap withou cash out refinance) and pay an extra $5k in prop taxes. I'd say you're doing ok.

How exactly are you going to tap that wealth? Take out a loan, on which you pay interest. If you lose ability to pay that loan, a lien on your house - or even a foreclosure results.

Basicallly there is no real way to not be a beholden slave to the monetary system and debt.

You tap that wealth by selling the house. You don't just get to turn something that you get to continue using into cash for free. Somebody is taking the risk that the value of the house is going down. And anyway, usually interest on refis are lower than what you can get prudently investing the money.

As I said, cash out refinance (easy with 50% equity).

Yes, if you're buying a house in the US you are typically going to take on some debt.

Those costs are all baked in to the price of rent. It's not like you get out of paying property tax by renting. Housing prices go up = your rent goes up.

What?

If you rent and retire you can go wherever rent is cheaper. Problem solved

Renting gives you flexibility. If the rent increases beyond your means, just move. When you find better job prospects (or need them), just move.

When you buy a house, you can't just move even if you need to do it. It is a lot more difficult. That's where I see the 2-3 hour daily commutes, which I feel is insane.

> You also pay money but never see any permanent return, as it doesn't matter how long you've been paying, you can never stop

Yes but at the same time, your capital isn't trapped in the place that you're living in. You also have to pay for yearly maintenance in both time and money (I personally hate this part the most). When you don't own a home, you can more easily do things like investing or using it to start something up.

> Yes but at the same time, your capital isn't trapped in the place that you're living in.

It probably varies by person, but I don't see that the same. If i was paying $2400/mo in rent, then i bought a house for $2400/mo mortgage, the capital in the house is not part of the capital i would have if i had been renting. That would just be gone.

> If i was paying $2400/mo in rent, then i bought a house for $2400/mo mortgage,

If rent was $2400/m, I can assure you that a house in the same area would be a lot more than $2400/m unless you put %50 or more as a down payment which is at least a few hundred thousand if not a million dollars. That's a lot of capital. If you choose a house in a cheaper area with a mortgage of $2400/m, then I can guarantee that there will be cheaper apartments in the area as well.

> the capital in the house is not part of the capital i would have if i had been renting. That would just be gone.

I'm not sure I understand what you're saying? Are we in agreement or are you disagreeing?

Currently i rent a 1br place for $2400, looking to buy something. I am strictly guessing that most people in my situation arn't going to be getting a mortgage that is thousands more than their current rent, but rather end up in something a little less nice that has a similar mortgage to the previous rent.

i will have to find a cheaper area to be able to buy a house(or condo more likely).

> I'm not sure I understand what you're saying? Are we in agreement or are you disagreeing?

Rent: pay $2400/mo for 30 years. Spent: $864k. Capital: $0

Buy: pay $2400/mo for 30 years. Spent: $864k. Capital: Whatever the house is worth. Hopefully around the 3-400k the loan was for, but half would still be better than the rent scenario

Together that doesn't sum it up, sure in that cheaper neighborhood maybe a rental would be $600 a month cheaper, $216k over those 30 years and more with compound interest. But rent doesn't stay the same like a mortgage does (baring intervention). An apartment that went for $1800 a decade ago (locally) goes for well over $2400 now.

> i will have to find a cheaper area to be able to buy a house(or condo more likely). Rent: pay $2400/mo for 30 years. Spent: $864k. Capital: $0 Buy: pay $2400/mo for 30 years. Spent: $864k. Capital: Whatever the house is worth.

1. As you've already mentioned, if you were to stay in the same area rent would be cheaper than a mortgage. Rent is always cheaper than a mortgage for equivalent real estate in the same area. So even if you moved, there would still be really strong reasons for renting since it would still be cheaper than buying a place. So your argument of $2400 rent vs $2400 mortgage is just wrong since moving to a different area will result in $1200 rent (or less).

2. Unlike a mortgage, you're not going to be spending anywhere close to $864k upfront. At most it's only going to be $7200 up front. If you were going to buy a place in the same neighborhood, it's probably going to be about $400,000 upfront, not including closing costs and other fees. Not including stuff like renovation or housing insurance either. Don't forget HOA for certain areas as well.

So if you have 500k in cash, if you rented you've about $492,800 for investing or for starting something up. If you bought a place in the same area, you have nothing for investing or starting something. So this "$0k vs Whatever the house is worth" argument is really flawed, especially when you consider that your capital is "stuck" with a huge opportunity cost unless 1) it appreciates a lot and you're willing to BOTH sell and move into a cheaper place that isn't as nice in terms of location or features (if you're not you're just stuck living in a nice expensive place which isn't a bad thing but remember opportunity cost), or 2) you're a professional house flipper (your home really is an investment and not just a place to live), and you repeat this process every 1-4 years.

If you haven't already guessed, I'm not a renter and I just figured that you want something more than normal people since you roam HN.

tbh i can't figure out if this is relevant to my situation or not, because i dont have 500k in cash, or even 50k in cash.

FHA loans start at 2.5% down, and $2400/mo puts the total loan amount somewhere around $350k. So bare minimum would be 2.5% down and 2.5% closing for $18k to get in the door. I'm shooting for more like $30k-$35k, but $18k is the minimum.

18k minus 7k leaves 11k that could have instead been invested. To me the value of keeping a portion of my rent as capital(even tied up and with risks of loss) combined with certainty about what my monthly cost will be 10 or 20 years down the line is worth a lot more than that $11k in the bank today.

> FHA loans start at 2.5% down, and $2400/mo puts the total loan amount somewhere around $350k.

1. It's very hard to get approved on less than %10 down post 2008, unless you're taking out a jumbo loan which is above $450k, and this is assuming you can meet all the new strict standards with income (based on what's reported to the IRS AFTER deductions) and credit history. How do I know this stuff? I bought my house after 2008, and so did a lot of my friends. On the off chance it gets approved, you'll be paying something called PMI which adds about %15 to your monthly payment. So $2400 turns into about $2760.

2. As I've already mentioned, if your mortgage is $2400 I can almost guarantee that there's an apartment in the same area where the rent is approximately $1200.

3. Using your example, putting a $3600 deposit for a rental is very different from $35,000 down which doesn't include any closing costs or house insurance. If you're in the Bay Area you also have to account for monthly HOA which is about $300-$500 and it can increase at anytime. So your $2400 / mo now turns into approx $3200 / month with PMI. With housing insurance, that baloons to about $3350

4. The type of home $350k buys in the Bay Area is most likely not going to appreciate beyond inflation, unless you buy something that isn't gentrified yet which incurs other types of risk.

I dunno, heres a home listed for $299k little more than a mile from where i currently am: http://www.zillow.com/homedetails/1515-14th-Ave-APT-201-Oakl...

I'm not saying its easy, but I think its possible. I'm perhaps being overly optimistic on down payments, the only person i know that bought a house recently did it in TX with 10%

I never said it was impossible. I'm just saying that renting still makes more sense than buying.

It also depends on your tax bracket. Mortgage interest and property taxes are tax deductible. So if you belong to a high income (dual income for eg) bracket and the math might favor buying vs renting based on how long you plan to live in that house.

You are condemned to a future of uncertainty anyways. That's the nature of living - you don't know what your income would be in the future, your health, your expenses. You can make some preparations - but you'd never be certain.

If you want the services the city provides, you have to pay for them. They are paid from property taxes. As those raise, so does the rent - after all, you live in the city, so you consume those services, so why don't you have to pay for them? That's your return - getting city services. If you don't like taxes being linked to property value - enact fixed taxes, but then you'd have to rein in city budget costs, including salaries, pensions, benefits, entitlements, etc. Somebody has to pay for all that. If not people living in the city, then who? If you want to stop paying for it, then you need to either stop consuming them, or find some other way to pay - what that would be?

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